How Do Late Payments Impact Your Credit Score?

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Whether you’re looking to purchase a house on a contract for deed, acquire a loan for college, or put down a car payment, your credit score is an essential part of the process. Credit scores are created based on a wide variety of criteria, and items such as late payments can reflect negatively on your score for years. 

Knowledge is half the battle when it comes to maintaining a high credit score, so read on to learn how late payments affect your credit and what you can do about it.

What is Your Credit Score?

To understand the importance of paying your bills on time and why late payments hurt so much, we first need to look at your credit score. Credit scores are compiled by three major credit reporting bureaus: Equifax, Experian, and TransUnion. 

They keep a record of every purchase and payment you’ve ever made. They’ll also know how many lines of credit, outstanding loans, and the debt you have to your name. So, what exactly is your credit score, and what does it mean? 

Stated by a credit repair Austin expert, the bottom line, your credit score determines how likely you are to pay creditors back on time. When you need a loan for any reason, loan officers will file with a credit reporting company for your credit report. 

Generally, the lower your credit score, the more hesitant a loan company will be to offer you the loan you want at the low-interest rate you desire. Higher credit scores always gain better loans at the best interest rates possible. 

A low credit score means you are less likely to obtain the full amount of your loan or, if you do, you’ll be paying a high-interest rate.

How Do Late Payments Impact Your Credit Score?

The single biggest factor that determines your credit score is your ability to pay back loans on time. Your credit score is the bottom line for creditors in determining how much of a loan they’ll be willing to give you, and how much of a risk you pose to their company. 

Loans are always risky, so loan companies use credit scores to ensure they’re making the wisest lending decisions possible.

When you miss a payment on your credit card, auto loan, mortgage, or other loan-device, the three reporting companies will be notified. Your late payment will then get placed into the scoring system that makes up your score.

Payment history accounts for 35% of your credit score, so missing even one payment can hurt your total score. The entire point of a credit score is to determine how reliable you are in paying back loans. Other factors impact your score but, outside of how much credit you’re using, the other factors contribute much less weight to your score.

Since payment history impacts such a large portion of your score, you could potentially drop 100 points due to a single late payment. It stays on your record for seven years, though its impact does lessen over time. 

It will, however, take quite a while to rebuild your score after significant damage.

What is Considered Late?

Nearly everyone has forgotten a bill from time to time. Two days past its due date, you suddenly remember you forgot to pay the water company and panic. You call, find out that you can pay right then and there, they slap a $20 late fee onto your regular bill, and you’re done. A sigh of relief. 

But did that late payment get recorded by the credit companies that keep track of your score? The straight answer is no. 

Late payments only get reported to the three credit reporting bureaus when they are a minimum of thirty days past due. The bill that you paid two days late will only affect your wallet, not your credit score. The car payment that you couldn’t make until forty-five days after it was due, however, will definitely show up on your score.

Do “Good Faith” Payments Help?

If you know you’ve got a bill incoming that you can’t pay in full on time, will it do you any good to pay half of the bill as a good faith statement? Unfortunately, no. 

A payment that is over thirty days late will be marked as delinquent by the credit reporting agencies, whether you’re late on $300 or .30¢. Good faith payments, while they might help you pay down your debt, will not help your credit score.

Not only do “good faith” payments not help, but the longer your bill goes unpaid, the more damage is done to your credit score. A 30-day late payment could drop your score as much as 90 to 100 points, even for someone who has never missed a payment.

How to Repair Damages

If you’ve missed a payment for a month or two, the damage has been done. There are action steps you can put into place, however, to help you get back on track.

  • Pay off debt as soon as possible. Save up and pay down your credit.
  • Get back to on-time consistent payments. The more you pay on time, the less damage your one-time late payment will do.
  • Set up auto-pay so you’ll never miss another payment.
  • If you know you’re going to be late, contact your credit agency and ask about working out a payment plan and adjusting the monthly amount owed.
  • Monitor your credit report. Keep up to date on payment history, penalties, and improvements in your credit score. Many companies that help you monitor your score will also provide tips and tricks to help you improve it.

Research your options. Talk with a professional and see what debt can be written off.

What Is Your Next Step?

If you’re reading this article, you’ve probably made a late payment and realize your score has been affected. While a late payment will most certainly impact your score, it’s not permanent, and it will improve over time. 

By paying your bills consistently and keeping track of your credit score, you’ll be able to get your score back up. What step will you take to improve your score?